On SSDI Payments and the IRS

Our Boston SSDI lawyers urge claimants to understand that they may be required to pay taxes on any benefits received. If you are the beneficiary of a private insurance plan and also the recipient of SSDI benefits, your insurance plan may require reimbursing them for any benefits collected from the Social Security Administration. However, the insurance company may not be concerned about the tax consequences you may face and the money you may to owe to the IRS.

It is important to keep in mind that private insurance companies and the Social Security Administration are often much more concerned about their respective bottom lines than your wellbeing.

According to a recent story in Forbes, a disabled woman began receiving benefits from her private insurance plan. The plan required that any benefits received under the plan be reduced by any Social Security Disability Insurance (SSDI) she received from the Social Security Administration (SSA).
She applied for benefits each year for three years, but did not receive anything from the SSA until the administration awarded her a lump-sum of just less than $50,000. She agreed to turn all but $1,500 over to the insurance company.

After making the payment to the insurance company, the insurance demanded more than $10,000 in income tax based upon the distribution by the SSA. They also added a penalty of more than $2,000 due to an accuracy error. Even though she only kept $1,500, she now owed the IRS more than $12,000.

The woman appealed the assessment by the IRS to the U.S. Tax Court, which was clearly sympathetic to the woman’s situation but stated that under the current laws enacted by Congress, there was nothing they could do due to the fact that she was assessed what is essentially a tax rate of approximately 800 percent on the amount of the lump sum payment she was allowed to keep.
This arises from the fact that the U.S. Tax Code does not count disability payments from a private insurance company as income, but does include certain payments from Social Security, including SSDI payments. The first 85 percent of any SSDI payments are considered taxable, according to this article.

The Tax Court called this an unfair and confusing result, but they had no power to change anything except for removing the accuracy penalty. The reason for the penalty was that disabled woman did not include the SSDI lump sum award as income on her IRS 1040 tax return. However, according to testimony, she went to two tax professionals to ask how to report the lump sum and was told she was not required to do so.

The Tax Court concluded that, because the woman asked in good faith when she spoke to the two tax professionals, and there was no evidence that she was trying to defraud the IRS, they did not require her to pay this penalty.

If you or a loved one is seeking Social Security Disability Insurance in Boston, call for a free and confidential appointment at 1-888-367-2900.